Pakistan State Oil

Pakistan State Oil Limited is the country’s largest OMC and is engaged in marketing and distribution of all petroleum products in the downstream oil and gas sector: Motor Gasoline (Mogas), High Speed Diesel (HSD), Furnace Oil (FO), Jet Fuel (JP-1), Kerosene, CNG, LPG, Petrochemicals and Lubricants. The leader of the downstream oil and gas sector also imports products like Mogas, HSD JP-1 and FO based on the demand.

The downstream oil and gas sector has been facing tough time much before coronavirus pandemic with falling consumption and sales of petroleum products. Part of this has to do with change in the energy mix that has affected both refineries and oil marketing companies; their revenues have shifted away from the furnace oil that once made the single largest contribution. LNG has been replacing FO in the power sector and retail fuels like diesel and petrol growth that took off in FY13 has also slowed down. PSO continues to lead the sector but has too seen its black oil market shrinking, and white oil market growth that was once thriving now consolidating

Shareholding and investments

Government of Pakistan holds the highest number of shares in PSO making up 22.47 percent shares according to the latest pattern of shareholding (June 2020) followed by NBP Trustee Department that has 14.88 percent shareholding. The firm has strategic investments including 12 percent in Pak Arab Pipeline Company, which is an associate company; 63.3 percent in Pakistan Refinery Limited; which is a subsidiary company; 22 percent in Pak Grease Manufacturing Company Limited; 49 percent in Asia Petroleum Limited, which is an associate company; 62 percent investment in Joint Installation of Marketing Companies,44 percent in Eastern Joint Hydrant and 50 percent in new Islamabad airport fuel farm as per the company’s FY20 annual report. A breakup of the shareholding pattern in shown in in the illustration.

PSO’s recent past

Compared to a growth ranging between -9 percent to 4 percent in the previous six fiscal years, FY17 was a better year for PSO as it witnessed a growth of 8 percent in sales volumes on a year-on-year basis. Rising volumes as well as prices and the RLNG business led to 30 percent year-on-year surge in the PSO’s sales revenues and 77 percent growth in the bottom-line.

PSO’s volumetric growth continued in FY18 in white oil segment, especially motor spirit and HSD even though the retail segment faced stiff competition from new entrants, and substantial discounts offered by competitors and the influx of smuggled products like diesel from Iran. However, in black oil segment PSO’s furnace oil volume declined by 29.6 percent year-on-year in FY18 due to government’s strategy of switching priority (merit order) of existing power plants to RLNG/natural gas from furnace oil. The company’s net revenues increased by 20 percent, year-on-year, while profit after tax went down by 15.2 percent year-on-year primarily on account of one-time reversal of deferred tax asset; decrease in other income by 32.7 percent year-on-year; and increase in other expenses by over 40 percent due to higher exchange losses on account of significant currency depreciation.

FY19 was a difficult year for the oil marketing segment due to the rising competition and economic downturn. Margins on products squeezed due to falling liquid fuel volumes by the sector. The decline continued for furnace oil, while the retail fuels especially diesel volumes also witnessed a decline due to falling demand from both the industrial sector, and the transport sector along with falling vehicle sales.

PSO’s revenues in FY19 increased by 9 percent, which was fairly satisfactory given an overall decline of around 38 percent year-on-year in volumetric sales as well as falling revenues of other OMCs. The company’s earnings however, slipped by 32 percent, which came from higher inventory losses as well as lower volumes. Plus lower other income and higher other expenses and finance cost weighed heavy on its profitability due to exchange losses from currency depreciation and high interest expense on borrowings. PSO’s consolidated accounts for FY19 showed that other income grew staggeringly by over two times because of gains on the acquisition and consolidation of PRL after PSO acquired stake in the refinery during the year.

FY20 scarred by inventory losses

FY20 was a painful year mostly because COVID-19 aggravated the decline in the volumes being sold by the downstream oil and gas sector. In addition to the petrol crisis that took place during the year, coronavirus outbreak and the resulting lockdown hit the consumption of petroleum products hard. The decline in volumes for the oil marketing companies that were already facing falling sales due to economic slowdown, mutiplied. PSO reported hefty losses after tax for the FY20 where the company’s loss after tax stood at Rs6.5 billion in FY20 against PAT of Rs10.6 billion in FY19. Asper the brokerage industry, out of the total expected inventory losses of around Rs20 billion that Pakistan State Oil Limited incurred in FY20, almost all if it was incurred in the 2HFY20 with the situation worse in 4QFY20.

Segment wise, the petroleum sector suffered alossin FY20 versus profits of FY19 again due to inventory losses incurred from the decrease in oil prices in international oil market. Also, the company also incurred a loss in the LNG segment in FY20 versus profits of FY19 due to increase in finance cost on financing higher receivables from SNGPL.

Apart from staggeringly high inventory losses in FY20, PSO’s decline in earnings was also facilitated by the decline in the company’s topline. Revenues for PSO slipped by 4 percent year-on-year during the year due to fall in volumes sold as well as the crude oil price crash. The company’s overall volumes fell by around 10 percent, and the decline was led by furnace oil sales that plunged by around 50 percent year-on-year. Also higher finance cost by almost 50 percent was a burden on the bottomline.

PSO in 1QFY21 and beyond

PSO had a breather in 1QFY21 after a difficult FY20. The oil marketing company returned to profits in the first quarter of FY21 after incurring a loss in the last quarter of 4QFY20. During 1QFY21, PSO witnessed a rebound in volumes with growth of 11.8 percent in motor gasoline, 17.1 percent in high speed diesel, and over 37 percent in black oil that also includes furnace oil.

The company’s revenues however slipped by one percent year-on-year due to decline in selling price of petroleum products during the quarter versus similar period of FY20. Decline in cost of sales at the same time however lifted gross profits with margins due to inventory gains. Moreover, distribution expenses remained flat while administrative expenses posted modest growth . However, the OMC’s other income declined by 23 percent, which was likely due to lower markup on delayed payments. But the respite from finance cost helped in the bottomline growth. PSO’s earnings for 1QFY21 increased by 46 percent.

Demand destruction from COVID-19 has aggravated PSO’s liquidity crunch. However, volumetric recovery in FY21 offers hope on the sales side. PSO has also launched Euro 5 Hi-Octane 97 and Altron Premium Euro 5 (92 Ron) during the months of August and September 2020; whereas plans for the launch of Euro 5 compliant HSD are also underway.